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THE CASE FOR STUDENT HOUSING

Colleges across the country have been getting ready for the onslaught of the Echo Boomers, the children of the Baby Boomers. An additional 1.7 million students will strain the already limited resources of many institutions. Housing takes a back seat to curriculum and programs in the battle for funding allocations. As a result, student housing needs are not being adequately addressed by the institutions themselves.

This is creating an opportunity for the private sector to step in and provide off-campus rental housing for these students.

Demand Factors

The parents of the children of today are the Baby Boomers born from 1946-1964. Their children are the Echo Boomers that total 80 million people representing one third of the U.S. population. This translates to a college student population of 16.8 million in 2005 with a projected increase to 18.5 million by 2012. This amounts to 1.7 million additional students. After that, demand levels off until 2016, after which the effects of the addition of the Generation Z population will be felt. Both the Echo Boom and Gen Z peaks will be approximately 4.1 million births, well above the 3.4 million of Generation X. This results in the college-age population projections shown in Chart One.

In addition, college participation rates and the percentage of the U.S. population with college degrees have been trending upward as shown in Chart Two. This has resulted in the historic and projected enrollments shown in Charts Three and Four. The increase in the total number of college-age youth, along with greater high school graduation and college enrollment rates and increased access to education will ensure that the demand will continue to rise well into the next decade. In addition, a very significant percentage of today's students are not graduating in the traditional four years. They are taking longer to graduate resulting in a need for housing for a greater period of time. It is also important to note that nearly 40% of today's undergraduates are older than 24 years of age, driving the need for more privacy and better options.

Demand for student housing is largely independent of economic cycles. It does not follow multifamily swings because buying a house or condo instead of renting is not an option. It can actually be countercyclical with economic downturns as people lose their jobs and go back to school for a graduate degree or to learn new skills. People want to improve their marketability for the future upswing in the economy. Demand is influenced by sheer numbers of youth coming into college age and by the appeal of a particular school.

Supply Issues

There was a need for additional student housing as the Baby Boomers moved through college largely from 1965-1976. At that time, schools built dormitories in which everything was shared: sleeping/study rooms, communal bathrooms and cafeterias. These facilities suited the needs and expectations of students and parents at the time.

The Echo Boomers are a much different generation. Most students are used to their own rooms. They do not want to share bathrooms, much less bedrooms. They expect and demand privacy, high-speed Internet connectivity, exercise equipment and high electrical capacity. The dorms are now predominantly used to house freshmen. Many schools have focused on this freshman experience in dorms with social and educational programs as a part of the indoctrination experience.

Few campuses have built new housing in the last 10 to 15 years. Many of the dorms are 30 to 50 years old. Some campuses require freshmen to live on-campus, but after that they vote with their feet and move out of the almost barracks-like conditions in some dorms. They have been raised by "helicopter parents' and they do not like those living conditions for their children either.

The budgets of most U.S. colleges and universities and the on-campus availability of university owned land do not allow for the expansion of student housing. Excess land is kept in inventory for the future expansion of academic facilities. Many budgets are decreasing, requiring all available funds to be allocated to programs, faculty and the upkeep of their existing physical plant.

Unfortunately, their other choices are often very poor as well. Off-campus student housing surrounding most campuses is, for the most part, old, outdated and overpriced for their lack of amenities. Most of the current stock was designed as conventional apartments with no emphasis placed on the special needs and desires of today's students. The parents did not like living in the existing facilities even when they were going to school. They are often paying for all or part of the student's housing and they want something better for their children than what they had.

Off-Campus Housing is a Fragmented and Inefficient Market

The largest student housing REITS combined own less than five percent of the off-campus housing stock in the U.S. Much of the housing is owned by small local groups that got started by buying 2, 4, 8 then 16 unit apartments and marketing them to students. They cannot bring the efficiencies of a professional property management team to bear. There is often a great deal of deferred maintenance. At the right price point, however, the larger of such properties can represent an opportunity for turnaround and will appeal to the more price sensitive segment of the market.

This fragmentation can provide opportunities for a professional team to come into a market and make a presence by purchasing several properties or developing new ones. Today's kids communicate with each other constantly through various media. They can be a part of your marketing team if you recognize this fact and work with them to create a positive living environment.

Diversification - The Demand Cycle is Independent of Typical Economic Cycles

Increases in demand can be mitigated, as with any real estate, by too much new supply. Following the basics is necessary by purchasing in areas with barriers to entry by others.

Higher Returns than Multifamily

Going-in cap rates for student housing are currently 25 to 100 basis points higher than for multifamily. This provides somewhat of a higher cash return as long as capital expenses and repairs are kept under control. It can be argued that, on a risk-adjusted basis, the return is even better. Well-located student housing should have lower volatility than multifamily. Nearby company layoffs will not affect demand. The students are on 12-month leases, so if they like the property and management, they are likely to return. Turnovers can be in the 25-50 percent range rather than 60-75 percent for apartments in general.

The risks of investing in student housing that have been perceived in the past have largely been mitigated through professional management and systems. Alleviating deferred maintenance helps in getting the students to respect their living environment. If not, monthly inspections and assessments sent to their parents can affect behavior. Also, 57 percent of the U.S. student population is now female; they usually cause less wear and tear than the guys.

Where to Invest

The above characteristics are true for many campuses throughout the country. The key is to find the right supply/demand balance. The growth rate of a campus' enrollment can be important, although opportunities exist at slower growth schools if there is a pent up demand that has not been met. Investing at larger schools generally will attract more buyers when it is time to sell. There are currently 281 schools with enrollments of greater than 15,000 students, so there are many to choose from. Opportunities can exist at smaller schools if other supply/demand factors are significant.

Location is very important as with any real estate, although student housing is much different from most other property types. A primary market for student housing may be a tertiary market for office properties. Proximity to the campus is key with the preference being within a mile. It is best to be within walking distance to the campus and amenities that attract students, including bars, restaurants and recreation. Student housing can work somewhat farther if it is on a bus line, but these properties tend to be isolated and not as attractive to students. There is also less supply constraint generally farther away from campus. Barriers to future competition are very important.

Some campus housing groups are cooperative in allowing private housing developers/owners to market to the students. They recognize both their limitations of supply and that a lack of good housing choices will weigh heavily on a family's decision as to what school they will choose.

What to Buy

Newer properties are preferable from an ongoing capital standpoint, although some new properties are poorly designed for today's student market. Dormitory-style housing is definitely out of favor and is generally only found in on-campus housing for lower classmen. Conventional style apartments can work well if there are sufficient bathrooms (generally one per bedroom), bedrooms are similar in size and the layout is efficient with individual privacy for studying.

More modern housing is designed specifically for students. Usually each bedroom has a separate bathroom and locks individually. Bedrooms are clustered around a common kitchen and living room. Preferably these are rented by the bed rather than by the unit. Parental co-signing of leases is desirable. These properties are generally larger and have extensive amenities, especially at the higher end, such as fully furnished apartments with full-sized kitchen appliances, washers and dryers in each apartment, a cyber café, recreational facilities, tanning capsules, quiet study and meeting rooms, high-speed Internet access, cable television, and sometimes even a theater room.

Property management issues dictate that properties with 100 or more units are best from an efficiency standpoint. This indicates investments of at least $10 million. Larger properties are also more likely to attract more institutional buyers on the back end. Several smaller properties in the same proximity could also work.

Conclusion

This sector has now been accepted by institutional investors, REIT's and astute private buyers. Investments at schools with strong demand and limited availability for an increase in supply should perform well over the next decade as the echo boomers enter campuses in larger numbers. The demographics show that the time to invest is from now through the next seven years.